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MOSL: EXPERT SPEAK - Bright growth prospects for tractors in India - MNCs to gain share




Motilal Oswal Securities Ltd.


28 Oct 2013





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EXPERT SPEAK: Bright growth prospects for tractors in India MNCs to gain share, but this would be a gradual process We hosted a call with Mr Ashok Anantharaman, Director (Marketing and Sales), New Holland Fiat India Private Limited, to get an update on the short-term outlook for the tractor industry, future prospects and competition. Our key takeaways: Growth to moderate to 8-9% in 2HFY14, but still strong: Growth momentum for the tractor industry is likely to continue. However, in 2HFY14, growth would moderate to 8-9% (v/s 24% in 1HFY14) due to upcoming elections in several key states. For FY14 as a whole, growth would be 16% (v/s de-growth of 1.5% in FY13). For FY15, growth is likely to be 6-8% and would be monsoon-dependent. Upcoming general elections in 1QFY15 (key period for tractor sales) could impact growth, as most of the administrative machinery would get involved with the elections. Broad-based growth, with most states contributing: Regionally, Chhattisgarh, Maharashtra, Madhya Pradesh and Rajasthan have grown by 83%, 50%, 43% and 41% YoY, respectively in 1HFY14. Andhra Pradesh recovered as well, with 40% YoY growth on good monsoon. Gujarat, which was impacted by drought last year, has been showing positive signs in the last 2-3 months. Karnataka has also recovered in 2Q, with positive growth. Financing environment conducive; private sector interest remains high: The financing environment remains conducive, given that tractor loans qualify as priority sector lending and risk-reward is more favorable than other segments if collection machinery is strong. The share of private financiers has risen to 55-56% from 25% 3-4 years ago. Several states still under-penetrated; long-term growth potential immense: Pan-India penetration is at ~20 tractors per 1,000 hectares. While in mature markets like Haryana, Punjab and Uttar Pradesh, penetration is at 50, 45 and 30, respectively, in all other states, it is below 20. Growth in 1HFY14 was largely driven by under-penetrated states. Internationally, penetration is 26 tractors per 1,000 hectares in the US and 22 in Pakistan. MNCs likely to gain share, but this would be a gradual process: Given their access to better technology, MNCs would gain relevance, as customers mature. While the pan-India market share of MNCs is in mid-single digit, in select mature markets, their market share is much higher. Market share gains by MNCs would, however, be a gradual process, considering the incumbents’ deep reach and their strong ecosystem. Enormous scope for tractor exports from India: India currently exports 75k-80k tractors annually. Considering India’s strength in tractors up to 55-60hp, the exports are largely to African countries, Vietnam, Myanmar, Cambodia, etc, where the major market is up to 55hp. There is enormous scope for tractor exports from India. Our view – Buy Mahindra & Mahindra: Considering the favorable monsoon and increase in MSPs, we expect Mahindra & Mahindra’s tractor volumes to grow 15% in FY14 (v/s 5% de-growth in FY13). This implies residual growth of 8% for 2HFY14. While we have built in strong tractor volumes for FY14, there is no visible catalyst in the Auto division, considering no major launches over 18-24 months. The stock trades at 12.7x/10.9x FY14E/15E consolidated EPS. Maintain Buy.

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